Trade-Weighted Dollar Remains in Dire Straits

Markets

The Fed’s hold at its November policy meeting ignited a corrective rally in US Treasuries (and core bonds in general). A minor positive US CPI print encouraged investors last Tuesday to add to pivot bets, circling the March 2024 policy meeting as earliest starting point of a rate cutting campaign. Last Friday’s intraday action – failing to close the week above the post-CPI highs with traders throwing the towel on better-than-expected, but second tier housing starts and building permits – suggests consolidation ahead in this holiday-shortened trading week. US markets are closed on Thursday for Thanksgiving with volumes traditionally low on (black) Friday as well. Daily changes on the US yield curve ranged between +4.8 bps (2-yr) and -2.6 bps (30-yr) with the German curve moving in parallel fashion (+1.4 bps at front end and -2.8 bps at the very long end). The (trade-weighted) dollar remains in dire straits even as the core bond rally seems to be losing some steam. DXY extends its drop this morning, falling to 103.70 which represents the lowest level since early September. Key support levels are 103.46 and 102.55 which are respectively 50% and 62% retracement on the greenback’s rally from mid-July to early October. EUR/USD is already past the 50% bar (1.0862) with the 62%-level (1.0960) nearby. Positive EU rating action (see News & Views), bullish risk sentiment on stock markets (China & South Korea doing well this morning) and still some underlying USD-weakness could force a test later on. In line with our consolidation view for core bonds, the 1.0960-level could nevertheless become a tough nut to crack. Today’s eco calendar is extremely thin. We eye tonight’s $16bn 20-yr US bond auction. During this month’s mid-month refinancing operation, the 30-yr Bond auction showed signs of weakness and also triggered an (intraday) market move (lower US Treasuries). Speeches by some ECB members and by BoE governor Bailey (after European close) are wildcards for trading. Bailey’s speech arrives as sterling is gently drifting lower and about to pop back in the broad EUR/GBP 0.8750-0.90 trading range after an extensive stay in the 0.85-0.8750 area.

News & Views

Rating agency Moody’s affirmed Italy’s rating at Baa3 and raised the outlook from negative to stable. The latter reflects a stabilization of prospects for the country’s economic strength, supported by the implementation of the post-pandemic recovery plan (NRRP), the health of its banking sector and the government’s debt dynamics. Growth in the next few years lowers the risk of a material and rapid deterioration in the fiscal situation. That said, fiscal strength remains constrained with the debt ratio expected at a high level in coming years of 140%. And this is highly sensitive to assumptions on growth, interest rates and the fiscal balance. Even a small deviation from the baseline could place the debt burden on more pronounced upward trajectory. Debt has an average maturity of around 7 years but because of high annual borrowing needs its affordability will still weaken relatively quickly. Moody’s does take into account the ECB’s TPI, which limits sovereign exposure to liquidity stress. Underpinning the lowest possible investment grade is the country’s large, diversified and competitive manufacturing sector, high household wealth and low private sector indebtedness. Institutional gaps however will probably prevent the country from fully profiting (through increased potential growth) from the what it calls a once-in-a-generation NRRP opportunity.

Portugal’s rating was bumped higher two notches by Moody’s from Baa2 to A3 with a stable outlook. The decision “reflects the sustained positive credit effects over the medium term of a series of economic and fiscal reforms, private sector deleveraging and ongoing strengthening of the banking sector.” Over the next few years and unlike in other ageing countries, Moody’s expects the negative impact of demographic trends on potential growth to be mitigated by sustained net migration, higher participation rates and an increase in labor productivity growth. Solid growth and broadly balanced budgets mean that the – although elevated – debt burden will continue to fall (to +/-100% in 2024, lowest since 2010) at one of the fastest paces among advanced economies. More positive trends in economic and fiscal strength than currently expected are balanced against recent evidence of political risks. With the latter, the agency refers to the recent resignation of PM over corruption investigations.